No.

10-1340

IN THE
Supreme Court of the United States

KFC CORPORATION,

Petitioner,

v.

IOWA DEPARTMENT OF REVENUE,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF IOWA

BRIEF OF AMICUS CURIAE

INTERNATIONAL FRANCHISE
ASSOCIATION IN SUPPORT OF
GRANTING THE PETITION

STEPHEN J. CALDEIRA A RTHUR L. PRESSMAN

President and CEO Counsel of Record
INTERNATIONAL FRANCHISE GREGG A. RUBENSTEIN
A SSOCIATION KENNETH H. SILVERBERG
1501 K St., N.W. SCOTT M. SUSKO
Suite 350 NIXON PEABODY LLP
Washington, DC 20005 100 Summer Street
Boston, MA 02110
(617) 345-1000
apressman@
nixonpeabody.com

A
236366

(800) 274-3321 • (800) 359-6859

 i

TABLE OF CONTENTS
Page
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . i

TABLE OF CITED AUTHORITIES . . . . . . . . . . . ii

INTEREST OF AMICUS CURIAE . . . . . . . . . . . . 1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SUMMARY OF THE ARGUMENT . . . . . . . . . . . . 6

ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A. The Petition Should be Granted to Protect

the Settled Expectations of $2.1 Trillion of
Domestic Economic Output . . . . . . . . . . . . . . 9

B. Allowing States to Collect Income Taxes

From Out-Of-State Franchisors Imposes
Undue Administrative and Economic
Burdens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
 ii

TABLE OF CITED AUTHORITIES

Page
CASES

A&F Trademark, Inc. v. Tolson,

605 S.E.2d 187 (N.C. Ct. App. 2004). . . . . . . . . . . 2

Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . 9, 16

Geoffrey, Inc. v. South Carolina Tax Comm’n,

437 S.E.2d 13 (S.C. 1993) . . . . . . . . . . . . . . . . . . . . 2, 7

Goodyear Dunlop Tires Operations, S.A. v.

Brown,
No. 10-76 (U.S.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Kerl v. Rasmussen,
682 N.W.2d 328 (Wis. 2004) . . . . . . . . . . . . . . . . . . 3

KFC Corp. v. Iowa Dep’t of Revenue,

792 N.W.2d 308 (2010) . . . . . . . . . . . . . . . . . . . . passim

Lanco, Inc. v. Director, Div. of Taxation,

908 A.2d 176 (N.J. 2006). . . . . . . . . . . . . . . . . . . . . 2, 13

National Bellas Hess, Inc. v.

Department of Revenue of Ill.,
386 U.S. 753 (1967) . . . . . . . . . . . . . . . . . . . . . . passim

Praxair Tech., Inc. v. Director, Div. of Taxation,

988 A.2d 92 (N.J. 2009) . . . . . . . . . . . . . . . . . . . . . 13
 iii

Cited Authorities
Page
Quill Corp. v. North Dakota,
504 U.S. 298 (1992) . . . . . . . . . . . . . . . . . . . . . . passim

STATUTES AND LEGISLATIVE MATERIALS

The Business Activity Tax Simplification Act

of 2011: Hearing on H.R. 1439 Before the H.
Subcomm. on Courts, Commercial & Admin.
Law (2011) (statement of Corey Schroeder,
VP & CFO of Outdoor Living Brands, Inc.) . . . . 7-8

Cal. Code Regs. tit. 18, § 25137-3 (2011) . . . . . . . . . . 16

Uniform Division of Income for Tax Purposes Act, § 17

.......................................... 16

OTHER MATERIALS

A rizona Dep’t of Revenue Hearing Officer

Decision, No. 200700083-C (Mar. 27, 2008) . . . . . 7

Bureau of Consumer Protection, Federal Trade

Comm’n, Buying a Franchise: A Consumer
Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Economic Impact of Franchised Businesses:

Vol. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

PricewaterhouseCoopers, The Economic Impact

of Franchised Businesses: Volume III, Results
for 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
 iv

Cited Authorities
Page
The Profile of Franchising: 2006, Franchising
World (Aug. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Bruce S. Schaeffer, Tax Aspects of Franchising,

559-2d T.M. (2005) . . . . . . . . . . . . . . . . . . . . . . . . . 8

What is a Franchise? . . . . . . . . . . . . . . . . . . . . . . . . . 3
 1

INTEREST OF AMICUS CURIAE1

This brief is submitted on behalf of amicus curiae

International Franchise Association (“IFA”).

The IFA is the oldest and largest trade association

in the world devoted to advocating the interests of
franchising. The IFA is a membership organization of
franchisors, franchisees and suppliers. Since its inception
in 1960, the IFA has represented the interests of the
franchise community and the American entrepreneurial
spirit that franchising embodies.

The IFA currently represents more than 300 different

industries and includes more than 11,000 franchisee,
1,100 franchisor and 575 supplier members nationwide.
According to a recent study conducted by PwC, over
825,000 franchise businesses are responsible for creating
nearly 18 million American jobs and generating over $2.1
trillion in economic output.

Since 1993, when it first invited franchisees to join, the

IFA has attracted more than 11,000 franchisee members,
one of whom currently serves as the IFA’s Chairman. The
IFA’s mission is to enhance and safeguard the business
environment for franchising worldwide. In addition
to serving as a resource for current and prospective

1. The parties have consented to the fi ling of this brief and

received timely notice of the IFA’s intent to do so. No counsel for
a party authored this brief in whole or in part, and no counsel
or party made a monetary contribution intended to fund the
preparation or submission of this brief. No person other than the
Amicus has made a monetary contribution to the preparation or
submission of this brief.
 2

franchisors and franchisees, the IFA and its members

work closely with public officials across the country to
shape the laws and regulations that govern franchising,
with the goals of promoting franchising’s growth and
achieving the interests of franchisors and franchisees. The
IFA is the only trade association that acts as a voice for
both franchisors and franchisees throughout the United
States and the world.

Counsel for amicus curiae has read KFC Corporation’s

petition for certiorari. Having read the petition, counsel
believes that the IFA’s analysis and the considerations
it raises in this brief will help inform the Court that
granting the petition is important and necessary to
protect the settled interests of thousands of franchisors
and franchisees, millions of individuals employed by them
and trillions of dollars of economic impact that franchising
provides to the United States economy. In short, the
IFA believes that franchising and the economic output
it generates will suffer significant negative impact if the
Supreme Court of Iowa’s decision is not overturned.

BACKGROUND

Unlike the previous tax nexus cases for which the

Court has denied review, see e.g., Lanco, Inc. v. Director,
Div. of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied,
551 U.S. 1131 (2007); A&F Trademark, Inc. v. Tolson, 605
S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 546 U.S. 821
(2005); Geoffrey, Inc. v. South Carolina Tax Comm’n, 437
S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993),
this case does not involve state tax planning structures
where intangible holding corporations (“IHCs”) were
created and utilized by intellectual property owners to
 3

minimize state tax obligations. 2 Instead, this case involves

the legitimate and well-recognized business method of
franchising, an arm’s-length contractual relationship in
which a franchisee is the direct licensee and beneficiary
of a franchisor’s intellectual property in the franchisee’s
local community.

At its most basic, franchising is a contractual agreement

between two unrelated and independent parties that:
(1) permits the franchisee to use the franchisor’s trademark
or service mark for the franchisee’s benefit; (2) permits
the franchisee to market a product or service using the
franchisor’s methodology for doing so; (3) requires the
franchisee to pay for use of the franchisor’s trademark and
methodology; and (4) requires the franchisor to support
the franchisee’s business through providing advice and
continuously developing and refining the licensed product
or service. See generally What is a Franchise, available at
http://franchise.org/franchiseesecondary.aspx?id=52625;
Kerl v. Rasmussen, 682 N.W.2d 328, 331 (Wis. 2004).

Often, a franchisor does not operate outlets itself and

instead concentrates its efforts on the development and
improvement of its trademarks and business systems
so its franchisees can compete effectively in their local
communities and respond to changing market demands.
In the franchising relationship, franchisors gain no direct
benefit from the services or market conditions in a state
because franchisors do not sell their products or services
associated with their marks to customers. Instead, it is
the franchisee that actually sells the product or service in

2. The IFA takes no position on whether these cases were

correctly decided.
 4

a particular state and thereby benefits from the market

conditions and infrastructure each state offers.

Businesses decide to franchise for a variety of reasons.

For example, franchising is an excellent way to expand
distribution of a product or service by leveraging third
parties’ capital. While this allows growth without taking
on large amounts of debt, it too comes at a price. In
franchising that “price” is allowing the capital-providing
franchisee to grow its capital investment by receiving the
true profit from the business. Unlike a loan provider that
receives only the agreed upon interest, regardless of how
successfully the capital is deployed, franchisees’ capital
contributions can be both repaid and grow.

In the typical franchise relationship, a franchisee

contributes capital by incurring the costs necessary to
develop and open its licensed business. As start-up costs
are often significant, franchise relationships typically
extend for ten or twenty years with an opportunity
to renew. This long-term relationship is essential to
franchising because franchisees require significant time
to recoup their initial capital investments.

Franchisees also typically pay a continuing royalty

fee for use of the franchisor’s trademarks, business
methodology and support. This royalty is usually
a franchisor’s primary revenue source and is its
compensation for development of trademarks and business
systems in the first instance and the on-going research and
support that help keep a franchisee’s business competitive
throughout the franchise term. As with other businesses,
franchisors set their royalty rate, i.e., price, based on the
revenues they determine are necessary to support their
 5

operations and generate a profit. Unlike other businesses,

however, franchisors cannot simply change their pricing to
adapt to market changes because the amount a franchisee
is obligated to pay is governed by a long-term franchise
contract.

For more tha n for ty yea rs, f ra nch isi ng has

been a successful way to grow businesses. In 2011,
PricewaterhouseCoopers released The Economic
Impact of Franchised Businesses: Volume III, Results
for 2007 (“Study”). See http://www.buildingopportunity.
com/download/Part1.pdf. According to the Study, in
2007 franchised businesses directly produced goods and
services worth $802.2 billion or 3.4% of private nonfarm
output in the United States, contributed $468.5 billion
or 3.9% of all private nonfarm United States GDP and
provided 9,125,700 or 6.2% of private nonfarm jobs. Not
surprisingly, franchising’s indirect impact on the domestic
economy is even greater. In 2007, franchised businesses
supported 17,430,700 or 11.8% of private nonfarm jobs,
$2.1 trillion or 9.0% of all private nonfarm output and $1.2
trillion or 9.7% of all nonfarm United States GDP.

When Iowa seeks to tax KFC on the royalties paid by

its Iowa franchisees, it does so acknowledging that KFC
itself has no physical connection to or presence in Iowa.
Petition for Writ of Certiorari, KFC Corp. (No. 10-1340)
at 8. Instead, Iowa argues that because it has provided an
infrastructure that allowed KFC’s intellectual property
to flourish, that is a sufficient economic nexus to justify a
tax on the royalty KFC’s Iowa franchisees pay. KFC Corp.
v. Iowa Dep’t of Revenue, 792 N.W.2d 308, 327-28 (2010).
What Iowa chooses to ignore is that its infrastructure is
paid for by the Iowa franchisees who operate within its
 6

borders, the sales taxes its citizens pay and the income,
property and school taxes that the franchisees and their
employees pay. The people whose tax dollars pay for Iowa’s
infrastructure use it just as KFC and its employees pay
for the infrastructure they use in their home state.

The ramifications of Iowa’s decision extend far beyond

its impact on KFC which has over 3,000 franchisees in
50 states. While the administrative burden and expense
of potentially 50 or more income tax fi lings are certainly
not welcomed by KFC, it may have enough resources
to carry that burden and expense and still support its
franchisees. The same cannot be said for the remaining
approximately 1,500 other franchisors who do business in
the United States and represent a significant percentage
of franchising’s economic impact. More than 60% of them
have fewer than 100 franchisees and more than 25 % have
fewer than 10 franchisees. The Profile of Franchising:
2006, Franchising World 56 (Aug. 2006). For them, a
dramatic increase in the number of income-based tax
fi lings and the associated costs of those fi lings, especially
when coupled with the likelihood of paying tax more than
once on the same royalty dollar, is simply too heavy a
burden to carry. As the burdens increase on franchise
systems, system failures and/or decreased economic
activity will no doubt follow.

SUMMARY OF THE ARGUMENT

The IFA strongly urges the Court to grant the

petition for certiorari to protect franchised businesses’
forty years of settled economic expectations and avoid
the almost certain decline in economic activity and job
growth that will result absent review and reversal. The
 7

current state of the law, with states split on the right to

impose income taxes on out-of-state franchisors, creates
tremendous uncertainty about franchisors’ past and future
tax obligations.3 This uncertainty is especially problematic
for multi-state franchise systems with long-term contracts
that cannot be modified to respond to fundamental
changes in tax obligations. Franchisors have established
their businesses and empowered independent owners to
create millions of jobs and trillions of dollars of economic
activity based on a fundamental economic premise
that is now under attack. That attack will undoubtedly
impose undue burdens on interstate commerce, including
potential retroactive tax obligations, that will result in
real economic slowdown and job loss among businesses
that utilize franchising.4

3. Again, although previous cases have addressed states’

efforts to thwart creative tax-driven structures, this is the
fi rst case to directly address the legitimate business method of
franchising. Despite this clear difference, the Iowa Supreme Court
incorrectly claimed that the fi rst IHC case, Geoffrey, Inc. v. S.C.
Tax Comm’n, involved “franchisors who earned income based on
franchise activities within the state.” KFC Corp., 792 N.W.2d at
320-21 (citing 437 S.E.2d 13, 15 (S.C. 1993)). In fact, Geoffrey did
not address a franchise situation, but rather a license between an
IHC and an affi liated operating corporation where the affi liate
had retail stores located within South Carolina. Geoffrey, 437
S.E.2d at 15.
4. Arizona, California, New Mexico, New York, North
Carolina, South Carolina, Washington and perhaps other states
are now claiming the right to collect income taxes from out-of-state
franchisors. See e.g., Arizona Dep’t of Revenue Hearing Officer
Decision, No. 200700083-C (Mar. 27, 2008) available at http://
www.azdor.gov/LinkClick.aspx?fi leticket=9ZY8i7xZVNE%3d&
tabid=105&mid=474; The Business Activity Tax Simplifi cation
Act of 2011: Hearing on H.R. 1439 Before the H. Subcomm. on
 8

KFC Corp. is an appropriate candidate for this Court

to resolve the mixed answers and at-odds approaches
offered by the sixteen states that have addressed the
physical presence/economic nexus issue outside of the
franchise context. Granting the petition also provides an
opportunity to reaffirm the Court’s decision in Quill Corp.
v. North Dakota, 504 U.S. 298 (1992) and protect the long-
settled expectations of the thousands of franchisors and
franchisees who have carefully arranged their economic
lives in reliance on it.

ARGUMENT

The petition is appropriately granted to avoid the

substantial negative impact the decision below is having
and will continue to have on the $2.1 trillion dollars of
annual economic activity that franchising in the United
States helps generate. Indeed, the amount of economic
activity implicated by Iowa’s decision in and of itself
justifies review by the Court. When coupled with the
actual reliance franchisors have placed in the Court’s
prior decisions and the undue burden Iowa’s approach
will impose on franchising specifically and interstate
commerce generally, the need for full review is plain.
Finally, review is necessary to preserve the Constitutional
distinction between Commerce Clause requirements and
Due Process requirements.

Courts, Commercial & Admin. Law, (2011) (statement of Corey

Schroeder, VP & CFO of Outdoor Living Brands, Inc.) available
at http://www.franchise.org/uploadedFiles/Franchise_Industry/
Government_Relations/BATSA%20Testimony%20Corey%20
Schroeder%20-%20IFA%204%2013.pdf; Bruce S. Schaeffer, Tax
Aspects of Franchising, 559-2d T.M. (2005).
 9

A. The Petition Should be Granted to Protect the

Settled Expectations of $2.1 Trillion of Domestic
Economic Output.

The success of franchising and its positive effect on

the United States economy is due in no small measure to
the predictable taxation scheme fi rst adopted in National
Bellas Hess, Inc. v. Department of Revenue of Ill., 386
U.S. 753 (1967), amplified by application of the “substantial
nexus” prong in Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977), and affi rmed in Quill. 504 U.S. at
298. 5 By limiting franchisors’ tax fi ling obligations to
only those states in which they have a physical presence,
the Court allowed franchisors to grow their businesses
through long-term contracts without fear of experiencing
the additional costs of preparing and fi ling multiple tax
returns in jurisdictions where they may have only the
slightest economic activity or the potential for double
taxation. Moreover, franchisors were able to offer their
franchises at lower cost due to the limited state tax fi ling
burden. The combination of long-term potential and
lower cost inspired by reliance on the Court’s precedents

5. Although Bellas Hess and Quill did not specifically address

income taxes, the Iowa Supreme Court’s focus on distinguishing
Quill and the decisions of several state appellate courts equating
“economic nexus” with “physical presence” demonstrate that
Quill’s physical presence requirement is recognized as applying
to income taxes. See generally KFC Corp., 792 N.W.2d at 320-22
(collecting and discussing various appellate court decisions). This
debate was, however, of no consequence to franchised businesses
because it was limited to IHC state tax planning scenarios, rather
than arm’s-length transactions between unrelated third parties
as in franchising. No previous case has sought to equate economic
nexus to physical presence in the true franchise context.
 10

has been successful for both franchising and the United

States economy. According to studies, franchising has
grown in the United States from producing $624.6 billion
of economic output in 2001 to $802 billion in 2007. See
Study; Economic Impact of Franchised Businesses:
Vol. 2 at 6 available at http://w w w.franchise.org /
uploadedFiles/Franchisors/Other_Content/economic_
impact_documents/EconImpact_Vol2_HiLights.pdf.

While no single factor can account for franchising’s

growth, franchisors’ ability to limit and know in advance
their state tax fi ling obligations undoubtedly played a
significant role. Specifically, it permitted franchisors to
lower franchise costs while maintaining sufficient returns
on investment, thereby spurring economic activity and job
growth. See Quill, 504 U.S. at 316 (“[I]t is not unlikely that
the mail-order industry’s dramatic growth over the last
quarter century is due in part to the bright-line exemption
from state taxation created in Bellas Hess.”).

As this Court explained in Quill, settled expectations,

especially as to a state’s authority to impose a tax, play an
important role in deciding whether to overturn precedent.6

6. There can be no reasonable doubt that permitting Iowa and

other states to collect income taxes from out-of-state franchisors
without a physical presence within their borders effectively
abrogates Quill. While the Iowa Supreme Court may sincerely
believe that use of intellectual property within Iowa’s borders
constitutes a “physical presence” there, that conclusion does not
comport with any common understanding (or this Court’s prior
view) of physical presence. Indeed, equating bona fide third
parties’ use of intellectual property within a state as a sufficient
basis for imposing taxes will likely have no less negative impact on
interstate commerce than allowing pure stream of commerce to
 11

Id. (discussing importance of settled expectations); see also

KFC Corp., 792 N.W.2d at 319-20 (recognizing important
role that settled expectations and stare decisis played in
Quill). Here, it is clear that franchisors both expected
and relied upon the physical presence requirement as
demonstrated by their entering into long-term contracts
with franchisees with fi xed royalty percentages. While
the length of franchise contracts varies from system
to system, they generally range from no less than five
years to as long as twenty years, with renewal options,
usually at a franchisee’s election. Bureau of Consumer
Protection, Federal Trade Comm’n, Buying a Franchise:
A Consumer Guide 4 available at http://business.ftc.gov/
documents/inv05-buying-franchise-Consumer-guide.pdf.
As a result, franchisors have no ability to alter the amount
of royalty they receive based on new tax fi ling obligations
imposed upon them until five, ten or twenty years, if then,
into the future. This actual reliance is precisely the type
of settled expectation the Quill Court relied upon in
rejecting challenges to Bellas Hess and which the Court
should again recognize to grant the petition and reverse
the Iowa Supreme Court. Quill, 504 U.S. at 317 (“[T]he
Bellas Hess rule has engendered substantial reliance
and become part of the basic framework of a sizeable
industry.”) Indeed, because this case involves applying
the Commerce Clause to a state income tax that imposes
a tax payment obligation on franchisors, as opposed to a
use tax obligation of collecting taxes from customers, the
settled expectations of franchised businesses are even

establish personal jurisdiction will have on international commerce

and is therefore no less worthy of the Court’ s review. See Brief for
United States as Amicus Curiae Supporting Petitioners, Goodyear
Dunlop Tires Operations, S.A. v. Brown, No. 10-76 (U.S.).
 12

more relevant than they were in Quill. Id. at 312 (“In

contrast, the Commerce Clause and its nexus requirement
are informed not so much by concerns about fairness for
the individual defendant as by structural concerns about
the effect of state regulation on the national economy.”)
Absent review, the effect on franchised businesses is clear:
those franchisors that are able to remain in business will
impose higher royalty rates to offset the increased tax
reporting and tax payment burdens, resulting in less
economic activity and lower job growth.

Permitting states to impose income tax filing

obligations would also upset franchisors’ settled
expectations by creating potentially significant retroactive
unanticipated tax liabilities. Again, the Quill Court
foresaw this exact concern and relied upon it in affi rming
the physical presence requirement. Id. at 318 n.10 (“An
overruling of Bellas Hess might raise thorny questions
concerning the retroactive application of those taxes
and might trigger substantial unanticipated liability for
mailorder houses.”). The concern here equals or exceeds
that in Quill. As the facts here establish, when in 2001
Iowa fi rst issued KFC an assessment for taxes, Iowa did
so for 1997, 1998 and 1999. KFC Corp., 792 N.W.2d at 310.
Not content with simply imposing a new tax, Iowa also
imposed penalties and interest based on KFC’s failure
to pay the tax Iowa had never before sought to collect.
Id. Should Iowa’s action escape the Court’s review, there
is good reason to believe that every other state and
jurisdiction with an income tax will follow Iowa’s example
and thereby create precisely the type of retroactive tax
obligation and unanticipated liabilities that the Court
 13

refused to condone in Quill. Needless to say, this would

likely have a devastating impact on small franchisors with
franchisees in multiple states.7

B. Allowing States to Collect Income Taxes From

Out- Of- State Fra nchisor s Imposes Undue
Administrative and Economic Burdens.

The decision of the Iowa Supreme Court must be

reviewed and vacated because it violates the most basic
Commerce Clause tenet: it imposes undue burdens on
interstate commerce. See Quill, 504 U.S. at 312 (“[W]e
have ruled that that Clause prohibits discrimination
against interstate commerce [citation omitted] and
bars state regulations that unduly burden interstate
commerce [citation omitted].”). It does so by imposing an
undue administrative burden on multi-state franchisors
comparable to the burden imposed by the use taxes held
excessive in Bellas Hess and Quill. See e.g., id. at 313

7. Again, this is more than just speculation. As stated above,

at least eight states (including Iowa) are currently seeking to
require out-of-state franchisors to pay income taxes on royalties
from in-state franchisees. Moreover, Iowa’s attempt to collect tax,
penalties and interest for at least three taxable years going back
to the 1990s cannot be interpreted as anything but retroactive.
Similarly, New Jersey has adopted an aggressive enforcement
position post-Lanco, 908 A.2d at 176, that there is no temporal limit
for past due income taxes. These enforcement policies demonstrate
that describing the retroactive impact as “devastating” is not mere
hyperbole. See KFC Corp., 792 N.W.2d at 310; Praxair Tech., Inc.
v. Director, Div. of Taxation, 988 A.2d 92 (N.J. 2009) (rejecting
argument that past due income taxes were limited to date of
regulation specifying their applicability based on new economic
nexus theory).
 14

n.6 (recognizing that complying with 6,000-plus taxing

jurisdictions that may impose use taxes is excessive). This
undue burden on franchised businesses and interstate
commerce violates the Commerce Clause and strongly
supports the petition and reversal.

As the Court recognized in Bellas Hess and Quill,

requiring national businesses to comply with sales tax
obligations from 6,000 plus jurisdictions is a fortiori an
undue burden on interstate commerce. 386 U.S. at 759-
60; 504 U.S. at 313 n.6. The burden use taxes impose on
businesses is at least comparable to that income taxes
would impose on franchisors. Income-based taxes would
require franchisors to make a multitude of determinations
arguably more complex than those generally involved
in calculating use or sales tax, including: (1) filing
methodology, i.e., whether the franchisor must file a
combined return with affi liates or a separate return;
(2) tax base, i.e., the calculation of state taxable income,
including the use of corporate attributes such as net
operating loss deductions and tax credits; (3) division
of income based on each state’s particular formulary
apportionment; (4) procedural rules such as estimated
tax and final return due dates; and (5) tax rates to apply
to the different amounts of taxable income allocated to
each jurisdiction. 8 See generally Brief for Council on State
Taxation et al. as Amici Curiae Supporting Petition for
Certiorari, Capital One Bank, N.A. v. Comm’r of Revenue
of Mass., (No. 08-1169) at 8-15. Further complicating the
analysis is the fact that no state’s rules are exactly the

8. To comply with sales and use taxes, a business is only

required to determine whether a transaction is taxable, and if so,
what is the applicable rate.
 15

same as another state’s rules. Id. As such, calculating the

income tax owed is anything but straightforward.

If the “economic nexus” theory put forth by Iowa

and the thirteen other states that have similar case law
is allowed to continue, franchisors will likely be faced
with state-by-state tax return compliance costs far out of
proportion to the income received in each state. This is
especially true for the overwhelming majority of smaller
multi-state franchisors for whom the costs of compliance
are not tied to the level of royalty income they receive.
Instead, costs will be driven by the number of taxing
jurisdictions in which franchises are located, rather than
the amount of royalty paid to their franchisor. As a result,
the Massachusetts franchisor with ten total franchisees
spread through Massachusetts, Rhode Island, Connecticut
and Maine will likely have compliance costs far out of
proportion to the limited royalty income it receives from
each state. Moreover, whether that small franchisor
chooses to offer a franchise in another state is directly
influenced by its weighing compliance costs against
incremental net royalty income.

The measure for undue burden is not limited to the

number of jurisdictions that could be implicated under the
expansive “economic nexus” theory, but rather includes
the true complexity that comes with calculating the
amount of tax. This complexity will certainly manifest
itself with the costs associated with complying with the
various rules in each jurisdiction. While the problems
presented by the sheer volume of sales and use tax
return jurisdictions may be solved with technology, the
calculation of income-based taxes involves more human
resources to make the individual judgments necessary to
 16

prepare an income-based tax return. This increased cost

presents an undue burden on the industries that utilize
the franchise business model.9

9. Franchisors may also be subject to an undue economic

burden in the form of having to pay multiple income taxes on their
royalty revenues. This would result, for example, where one state
seeks to impose its income tax on royalties paid by franchisees
located within the state, while the franchisor’s home state also
lays claim to taxing that same revenue based on the franchisor’s
operations in the home state that permit the royalty revenue to
be generated. Compare Cal. Code Regs. tit. 18, § 25137-3 (2011)
(providing that franchise fees or royalties for use of the franchisor’s
trademark are attributed to the state in which the franchisee’s
business is located, assuming the franchisor is taxable in that
state) with Uniform Division of Income for Tax Purposes Act, § 17
(apportioning all revenues to state where activities occurred that
permitted revenue to be generated). Although the case below
does not specifically call into question the “fair apportionment”
prong of Complete Auto, 430 U.S. at 279, the reality is that double
taxation will occur in certain situations without a physical presence
requirement, thereby imposing an economic burden on franchised
businesses.
 17

CONCLUSION

For the reasons stated above, the IFA asks the Court
to grant KFC’s petition for certiorari and again affi rm
Quill’s physical presence requirement for the imposition
of a state tax.

Respectfully submitted,

STEPHEN J. CALDEIRA A RTHUR L. PRESSMAN

President and CEO
INTERNATIONAL FRANCHISE
A SSOCIATION
1501 K St., N.W.
Suite 350
Washington, DC 20005
Counsel of Record
GREGG A. RUBENSTEIN
KENNETH H. SILVERBERG
SCOTT M. SUSKO
NIXON PEABODY LLP
100 Summer Street
Boston, MA 02110
(617) 345-1000
apressman@
nixonpeabody.com

Attorneys for Amicus

Curiae International
Franchise Association